The Tesla Hustle

Tesla Motors, with great fanfare, announced this week that its third quarter profit was $21.9 million. This is the first time in three years that its quarterly earnings were positive. Has Tesla turned the corner or was the third quarter an artifact?

Tesla sales benefit from a generous taxpayer subsidy–$7500 per vehicle—and its ability to sell credits granted because its cars have no emissions. Those credits were worth $139 million, $100 million more than the same quarter last year. Selling nothing for a profit and relying on government subsidies is not a business model for long term success.

Most financial analysts are highly skeptical of Tesla’s long-term viability. In the fourth quarter of 2015, it was reported that Tesla lost about $18,000 for each Model S sold. That loss is now reported to be $4000 per Model S its high priced vehicle. Whatever the correct number, you don’t make money selling at a loss. None the less, some investors using rose colored glasses keep driving up its share price. Currently its market capitalization is bigger than the combined value of Mazda, Fiat, Ferrari, and Porsche. And, its price/earning ratio is a whopping minus 57 to 1. That is the kind of P/E ratio that led to the tech bubble burst in the early 2000s.

When a sell off in the market occurs, and they always do, companies with stratospheric PEs take a big hit in their share price and their capitalization. Investors who continue to drive up Tesla’s price allow profit taking by those who bought low. It could be that smart investors, like those who made money in the home mortgage melt down, are seeing a case of the “greater fool theory” at work and just hope that no one takes the punch bowl away anytime soon.

Tesla is an attractive vehicle with plenty of pick up. It’s a head turner. But, in the real world it has to compete over time against established manufacturers who actually turn a profit. The best way to test the viability of EVs, and Tesla in particular, is for the government to remove subsidies and other inducements and let manufacturers of EVs compete in the market place. The key to viability, however, is not less maintenance, which EVs have, it is battery cost, range and a reputation for quality.

Lithium-ion batteries represent the current state of technology. Although breakthroughs have been predicted, they have not taken place. One reason according to MIT’s Technology Review is “One difficult thing about developing better batteries is that the technology is still poorly understood”. Battery cost is still about double the target of the US Battery Consortium, range is limited, and lithium-ion batteries are a fire risk. Until those problems are solved, EVs will have a niche market for the wealthy and the ultra green drivers. Former GM and Chrysler executive and icon Bob Lutz told CNBC’s Squawk Box in February that “companies such as General Motors will not be making any money on their “Tesla killer.” They are making these vehicles to appease Washington. …The majors are going to accept the losses on the electric vehicles as a necessary cost of doing business in order to sell the big gasoline stuff that people really want.”

Elon Musk has proved himself to be a crony capitalist extraordinaire and he is raking in a lot of investor and government dollars but if Washington removes its subsidy gift, Tesla is likely to go the way of the Tucker and De Lorean, out of business.